9911796707
TMI Blog2018 (9) TMI 1812X X X X Extracts X X X X X X X X Extracts X X X X ..... admit assessee’s additional evidence and leave it open for the TPO to carry out necessary factual verification. Next submits that lower authorities have also erred in law as well as on facts in treating the assessee to be providing information technology enabled services whereas the TPO’s observations hold it to be an entity having provided consultancy including tax regulatory services and software (including resale) as well as related technical services. He refers to a detailed chart of all the relevant heads in both tax regulatory advisory and consultancy services on record. All this assessee’s assertions appear to be prima facie correct. The fact however remains that we have already restored the entire issue of correctness of transfer pricing adjustment back to the TPO for afresh adjudication. We therefore leave it open for him to adjudicate all factual as well as legal issues; as the case may be in consequential proceedings. The assessee’s former five substantive grounds to this effect are accepted for statistical purposes. Ad hoc disallowance @ 40% of the total expenditure claimed - AO disallowed the same alleging assessee’s failure in providing all the relevant particulars of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... link with business activities. The relevant case law hereinabove (supra) involves instances of contribution paid for construction of chamber and commerce building, contribution towards canal construction irrigating sugarcane fields and participation expenditure in a trade, association or fund set up for advancement of business; respectively. No such facts emerge from assessee’s impugned claim. We thus decline the same on this count Disallowance of training expenses in lumpsum as against 25% ad hoc disallowance proposed earlier - as contended that all these expenses have been incurred for upto date knowledge to its work force’s knowledge, forming keyelement of operation efficiency - HELD THAT:- We find force in assessee’s instant claim of staff training expenses in principle. The Revenue fails to indicate any rebuttle regarding first and third heads hereinabove. The only question remain is that of miscellaneous vendor payment whose details are nowhere forthcoming a part from PAN etc. We thus confirm the impugned disallowance of 13,93,752/- to the extent of 3,23,897/- only. The assessee gets part relief. Addition of PWCDA network form charges - same to have been paid to its eponymou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghted during the course of hearing at the Revenue’s behest. We thus quote hon’ble Delhi high court’s decision in DIT vs. Lufthansa Cargo Limited [[2015 (5) TMI 873 - DELHI HIGH COURT]] to delete the impugned disallowance. Withholding of tax - HELD THAT:- Payment to M/s Lorman Zyrwa 30,19,942/- are stated to be 22,34,904/-. Coupled with this, the assessee submits that another payment of 21.24 lacs pertains to payment Bhutan based payee on account of the said nation’s government initiative which is akin to Bangladesh payment provided u/s 9(1)(vii)(b) of the Act. We therefore accept the assessee’s argument to the extent indicated hereinabove. Professional payments to non-resident payees - as per assessee Section 90(2) makes it clear that it is very much open for an assessee to opt for more beneficial provision either in under domestic law or as per the relevant Double Taxation Avoidance Agreement; as the case may be - HELD THAT:- Double Taxation Avoidance Agreement with Australia, Singapore, France’s DTAA to be not involving any FTS clause or the same to be taxable only if ‘make available condition is satisfied.. All these submissions have gone unrebutted from the Revenue’s side. We s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck to the Assessing Officer for necessary factual verification as per law. X X X X Extracts X X X X X X X X Extracts X X X X ..... ices. Next came choice of the relevant filters i.e. availability of data for financial year 2011-12, companies having income from software services less than 75% of their total revenues, those with more than 25% related party transactions, persistent loss making entities, those with different financial years ending than that on 31.03.2012, functional different and turnover not between 5 to 500 crores; respectively were ordered to be excluded. 6. The assessee had chosen operating profits / over total cost as its profit level indicator "PLI". The TPO proposed overall revenue in cost @ 1.5% in his show-cause notice. Next came his 11 comparable entities namely Acropetal Technologies Ltd. (segmented), CTIL Ltd.,, Datamatics Global Solutions Ltd., RS Software Ltd., ASM Technologies Ltd., e-Infochips Ltd., Onward Technologies Ltd., Thirdware Solutions (P) Ltd., Sasken Communications Technologies Ltd.,, e-Zest Solutions Pvt. Ltd., qua Goldstone Technologies Ltd., having operating profits over total cost of 20.67%, 11.47%, 14.09%, 15.28%, 16.41%, 74.97%, 13.61%, 25.24% 12.13%, 16.06%, 10.86%; respectively averaging 20.98%. It was this average PLI what was finalized sought to be applied in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avoid mentioning the details of services rendered as per it's submission dated 04/09/2015, which the undersigned has mentioned in the SCN, which clearly indicated that the primary nature of the services rendered to the AE was in nature of IT services. Thus there was no fault regarding functional profile as arrived at by the undersigned. 5.2.2 The assessee had reiterated selection of PwCDA as the tested and conducting benchmarking analysis using foreign comparables. The services provided by the assessee to its AE are basically in the nature of Infrastructure management, Software development and IT consultancy services. The assessee is performing functions for its AE which a complex entry would require from the vendor to perform. Such type of work is also not needed by a company which has distribution functions. The Transfer Pricing report about the functions performed by the AE cannot be relied upon. Moreover, the supplementary submission of the assessee providing a brief insight about the services rendered to the AE, and the 3CD report reveals more function about the assessee than the transfer pricing report as consulting service including tax and regulatory services, software d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer pricing method can be applied in a reliable manner and good and reliable comparables can be found. It can be the entity with less complex functional profile so as to enable less complex analysis. The tested party may have (a) reliable and accurate data, (b) least complex data and (c) the data is usable without much adjustments, The Ld AR stated that the AE was selected as the tested party as it was performing simpler function in the set interaction. The fact remains that the AE is a much more complex entity than the assessee as it is the creator of the assessee, performs all functions on the value chain of deliverables for the clients across its global sweep. Whereas the assessee is not operating on such broad canvass nor is the assessee holding the controlling stakes and comprehensive authority over its swathe of the AEs. Just because the AE, for record, performs a simpler function in this transaction with the assessee would not render it simpler entity. The AE retains with itself the major functional responsibility in terms of laying out the work distribution function- the AE decides whether the external consultants will be engaged for executing the work or the execut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same. The deliverables are processed and the handed to the end user. If the assessee is not doing any such value addition, the whole purpose of such contract/assignment is defeated. Such a scenario is a commercial impossibility. A perusal of the functions performed by the assessee for the UK based AE indicate a clear value addition to the services. Besides, it is incomprehensible as to how services denuded of value addition can be delivered. The details of services rendered and some invoices have been furnished before the panel to consider the primary nature of such services. The nature of services rendered are listed hereunder to support the above conclusion: I. The services involving PwC DA UK are SAP Advisory, staffware workflow, IT Application support, ER &P Productisation, IT Spreadsheet services and so forth- to name a few. II. The services involving PwC Lanka are Surveillance, Samurdhi Programme and project management- to name a few. The assessee claims to be in business of rendering management consultancy services. The examination of the TP study does not bring out the functions performed by the assessee very clearly. The assignments are listed in ambiguous terms. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is similar. The profile has also been discussed in the para in objection no 4. The panel does not find any infirmity in applying TNMM. The application at entity level is also understandable in view of the nature of transactions vis a vis same tested party with same set of comparables. The panel has requested the assesse to furnish computations basis segregated data. The assessee has not furnished its set of alternate comparables. Accordingly, the panel is inclined to uphold the action of the TPO. The objection is hence dismissed. 5. Without prejudice, that on the facts and in the circumstances of the case, the Ld. TPO and Ld. AO have erred in not .restricting the adjustment to the maximum of gross margin (i.e. 7.5% of the billing to end customer) earned by PwC DA. DRP Directions: The Indian TP regulation per chapter X of the Income Tax Act 1961 is an antievasion tool to prevent adverse profit shifts. The materiality of examination of the International Transactions has to be in this light. Therefore, the testing has to be done in order to examine if the Indian entity is offering its profits to lawful taxation in India. In order to determine the correct profits by ascertaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee claims to be in business of rendering management consultancy services. The examination of the TP study does not bring out the functions performed by the assessee very clearly. The assignments are listed in ambiguous terms. The panel called for and examined specific assignment details. The chart produced in this regard clearly indicates the nature of services rendered to be of IT and ITES type of services. The TPO has also categorized the International Transactions accordingly. The choice of comparables by the assessee in the TP study shows that the profile of such entities to be of IT and ITES type. Further, the choice of parameters in the database whereby the criteria of search are laid down also indicates similar. The NACE codes [NACE (Nomenclature of Economic Activities) is the European statistical classification of economic activities. NACE groups organizations according to their business activities. Statistics produced on the basis of NACE are comparable at European level and, in general, at world level in line with the United Nations' International Standard Industrial Classification (ISIC). The change in the identification and grouping of similar economic activit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer pricing adjustment of ₹345,51,562/-. 15. It emerges at the outset that the assessee has filed its application seeking admission of additional evidence in the form of segmental profits in relation to its AE in question. It quotes Rule 29 of the Income-tax Appellate Tribunal Rules, 1963 in support. It pleads that the lower authorities ought to have taken into consideration its segmental profit only than entity based results. It invites our attention towards the impugned transfer pricing adjustment computation enterprise qua the entire operating expenses of ₹109,22,00,000/- as against the relevant value of international transactions of ₹1848,88,843/-- (supra) only as per various judicial precedents CIT vs. Ratilal Bechlal & Sons (2016) 65 taxman.com 155 (Bom), CIT vs. Fire Stone International Pvt. Ltd. (2015) 60 taxman.com 235 (Bom), CIT vs. Thysen Group Industries (I) P. Ltd. (2016) 70 taxman.com 329 as well as CIT vs. M/s Tara Jewel Export Pvt. Ltd., ITA 1814/2013 decided on 05.10.2015 hon'ble Bombay high court. Its case accordingly is that lower authorities right from the TPO upto Assessing Officer as well as DRP have erred in law as well as on facts i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e refers to a detailed chart of all the relevant heads in both tax regulatory advisory and consultancy services on record. All this assessee's assertions appear to be prima facie correct. The fact however remains that we have already restored the entire issue of correctness of transfer pricing adjustment back to the TPO for afresh adjudication. We therefore leave it open for him to adjudicate all factual as well as legal issues; as the case may be in consequential proceedings. The assessee's former five substantive grounds to this effect are accepted for statistical purposes. 18. The assessee's next substantive ground pleads that all the lower authorities have erred in law as well as on facts in making ad hoc disallowance of ₹10,51,88,324/-@ 40% of the total expenditure claimed amounting to ₹26,29,70,810/-. There is dispute about the impugned expenditure to be pertaining to various goods and other works purchases to employee's reimbursement, guest house expenditure, project expenses, food and laundry charges. The Assessing Officer disallowed the same on estimation basis @ 40% alleging assessee's failure in providing all the relevant particulars of its payees as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onveyance charges have been incurred for visiting working places, government departments, project sites, meetings, seminars business development initiatives, recruiting derive and business events etc., Mr. Kaushal pleads that assessee's details totaling to 1919 pages as well as supporting documents comprising 2500 pages form part of records have gone unrebutted. He thereafter clarifies that assessee has already deducted TDS on payments of ₹14,65,80,718/-. An amount of ₹8,60,919/- is stated to have not attracted the said TDS deduction. He is fair enough in informing us that assessee has itself disallowed an amount of ₹475,48,648/- in tax computation valued by credit entries / reversal of ₹297,53,220/- corresponding reimbursement to employees' are stated to be involving an amount of ₹344,060,684/-. Next comes an amount of ₹311,510,067/- comprising air fare, train, and conveyance charges only leaving behind miscellaneous amount of ₹36,53,95,215/- in dispute. The assessee's case accordingly is that the lower authorities ought not to have estimated the impugned disallowance @ 25% without pin-pointing any irregularity in the relevant books of acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in assessee's above submissions. We make it clear that although it has placed on record its only membership detailed followed by actual payment. it is very much imperative to prove the scheme of above counal or its bye-laws vis-à-vis the assessee's relevant business activity. We are of the opinion that mere payment of an amount does not prove the same to be having direct link with business activities. The relevant case law hereinabove (supra) involves instances of contribution paid for construction of chamber and commerce building, contribution towards canal construction irrigating sugarcane fields and participation expenditure in a trade, association or fund set up for advancement of business; respectively. No such facts emerge from assessee's impugned claim. We thus decline the same on this count alone after appreciation of the entire facts relevant to the issue. The assessee fails in its eighth substantive ground. 22. The assessee's next substantive challenges correctness of lower authorities action disallowing an amount of ₹30,97,752/- incurred towards training expenses in lumpsum as against 25% ad hoc disallowance proposed earlier. The assessee's case before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has gone unrebutted from the Revenue side whose case is that there is no business link forthcoming from the impugned expenditure. We find no substance in Revenue's instant stand. We make it clear that the assesseecompany is engaged in multi functional consultancy services as a group entity of PWCDA organization based in Netherlands. Learned counsel has also filed before us relevant assessment records with regard to the payee entity pertaining to the impugned assessment year itself accepting the returned income without making any addition. Necessary reference regarding Firm Services Agreement is also made to paper book pages 6304 and 6305. It emerges that this Tribunal's decision in DCIT vs. Ernst & Young (P) Ltd. 49 taxman.com 386 (Kol) also holds that no TDS is deductible in case of such firm services agreement payments not including any income component but only reimbursement of expense on cost allocation formula. We take into account all these facts as well as judicial precedents to delete impugned disallowance of Firm Services expenditure payment amounting to ₹150,046,130/-. 24. Learned counsel does not press for assessee's eleventh substantive ground of foreign exchan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eption provision itself since it has been paid in respect of services utilized in a business or profession carried on by Bangladesh based payees in the said country only. There is no dispute on this clinching facts as highlighted during the course of hearing at the Revenue's behest. We thus quote hon'ble Delhi high court's decision in DIT vs. Lufthansa Cargo Limited [375 ITR 85 (Del)] to delete the impugned disallowance. 28. Next disallowance amount is ₹ 30,19,942/- out of which the assessee paid ₹ 2,24,904/- and ₹ 90,000/- to M/s Lorman Zyrwa & Maryline Nong Kynrih not inviting TDS deduction in view of nil withholding certificate as per page 262 in the paper book. Remaining amount as per assessment order involving payments without non-deduction of TDS out of ₹ 30,19,942/- are stated to be ₹ 22,34,904/-. Coupled with this, the assessee submits that another payment of ₹ 21.24 lacs pertains to payment Bhutan based payee on account of the said nation's government initiative which is akin to Bangladesh payment provided u/s 9(1)(vii)(b) of the Act. We therefore accept the assessee's argument to the extent indicated hereinabove. 29. This leaves us w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emerges at the outset from page 44 that the above payee has already obtained nil withholding tax certificate dated 21.02.2011 of the Act. It is also stated to be exempt u/s. 10(26) of the Act. We therefore delete the impugned disallowance to the extent of ₹44,000/-. Coming to the balance provision amount for rent of ₹2,73,000/- learned counsel fails to offer any explanation regarding the basis thereof as per the case records. We accordingly affirm the impugned provision disallowance in these peculiar facts and circumstances. 31. The assessee's next substantive ground seeks to claim tax credit relief u/s. 90 of the Act qua various sums withheld foreign tax jurisdiction to ₹204,49,803/- pages 286 to 290 contain a list of all such countries. Learned counsel representing assessee quotes sec. 90 and 91 of the Act. His only plea before us that all the relevant details for raising the impugned claim of foreign tax credits are very much available vis-à-vis the list of such nations. The Revenue on the other hand submits that those detailed exercises of factual verification regarding India's Double Taxation Avoidance Agreement with the assessee's list of countries n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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